“Meridian chief executive Mark Binns released a statement to the stock exchange this morning saying that despite significant efforts by both parties there remained a “major gap” between them and Meridian believed it was “unlikely” that a new agreement could be reached with Pacific Aluminium.”

Tiwai consumes 1/7th of all power consumption in NZ. If Tiwai stops consuming this power then demand falls and spot prices tank.(The supply of electricity is spot-priced at half hourly auctions at over 250 nodes around NZ.Â Should an energy consumer like Tiwai, connected directly to the National grid stop drawing, it will drag down the price of power and reduce profits to all electricity providers.

Power prices will lower for consumers while providers draw less profits until demand increases.

Go, us.But if you’re a government about to float a state-owned electricity provider, ie, Mighty River Power and you want a sizeable capital injection, the last thing you need is some fiasco affecting the price of power and profit margins.Â

Background:

Tiwai and Meridian struck a deal in 2007 for power supply to Tiwai to last until 2030. Given the market conditions for aluminum when it was negotiated, the deal which took months to arrive at, was reasonably well weighted on the side of Meridian.

Since then, prices for aluminum have tanked and the cost of production has risen. Rio Tinto wrote down the value of it’s aluminum enterprises by 11bn in January bringing the total writedown on it’s aluminum assets to 27bn.Â

Tiwai want to renegotiate the deal with Meridian as the profit margin on Aluminium production is nonexistent. Millions of tons of aluminium sit in warehouses around the world due to oversupply. Tiwai in recent months has reduced the production of Aluminium by 5%.The trend is not going to reverse anytime soon:

Aluminum Corporation of China (Chalco) posted its worst results since going public in 2001, chalking up a net loss of 8.23 billion yuan (HK$10.18 billion) for last year.The loss, compared with a net profit of 238 million yuan in 2011, is one of the biggest annual losses for a mainland state-owned firm for last year.Last year’s loss was much steeper than the 4.8 billion yuan average loss estimated by 21 analysts polled by Thomson Reuters. They forecast it would post a net loss of 2.05 billion yuan this year and another loss of 620 million yuan next year.Metallurgical Corporation of China warned in late January that it expected to post a net loss of 7.2 billion yuan due to hefty provisions on Huludao Nonferrous Metals, one of the mainland’s largest zinc smelters, and its investment in an iron-ore mining project in Australia majority-owned by Citic Pacific.Chalco, the country’s largest producer of aluminium, blamed the loss on a 7 per cent fall in the average selling price of the metal, which led to a 6.6 billion yuan reduction in gross profit.The economic slowdown on the mainland, coupled with Europe’s debt-stricken economy, were to blame for the drop in the metal’s price, Chalco said. The more favourable economic trend on the mainland and in the United States this year would support consumption of the metal, but oversupply still persisted, it added.

In question time in New Zealand parliament today Shearer tried to make the issue one of “transparency with a supplementary question fielded by Tony Ryall: “Is the government negotiating separately with Rio Tinto and has Meridian been kept fully in the loop on these negotiations”.Shearer got the usual pushback over his hidden UN bank account. However, he is starting to look confident and if he pulls on this stand of wall in the ball of yarn he may very well have the NZ government over the barrel on Tiwai.

WHAT TO DO:

The government should not be subsidising Tiwai with taxpayers dollars. Meridian has already prepared for alternatives should Tiwai renege. And if Transpower increased transmission capacity to the North Island then any surplus power should be drawn upon quickly.